BRASILIA (Reuters) - Brazil's lower house of Congress on Wednesday approved a watered-down version of a bill that imposed spending limits on cash-strapped states in exchange for hefty debt relief.


Lawmakers voted 282-140 to approve the main text of the bill after the government bowed to pressure from governors and removed tougher limits on states' spending on employees. The legislation faces further discussion and possible modifications in the lower house before being sent to Senate.


Separately on Wednesday, Finance Minister Henrique Meirelles said in remarks to businessmen that confidence in the Brazilian economy is returning and the country is entering a growth curve, though fundamental problems still have to be tackled to restore balanced public finances.


Meirelles said the agreement struck with lawmakers showed that Congress is well aware of its responsibility in helping to tighten Brazil's fiscal belts.


"I'm certain we will see a different country, one where confidence, enthusiasm and the ability to believe in the future is returning," Meirelles said.

Increasing taxes was an option of last resort, he said, that the government might not have to turn to if the scenario improves.

Priorities remain capping public spending through a constitutional amendment proposed by the government, improve governance of state companies and pension funds, reform labor laws and opening up the subsalt off-shore oil reserves to greater investment, said Meirelles.

Even though interim President Michel Temer's government had to settle for less than it wanted in talks with the lower house of Congress, the minister stressed that it will include a limit on spending growth to the rate of inflation of the previous year.

The watering down of the state debt bill raised questions about Temer's commitment to austerity as he strives to recover trust in Brazil's government finances in the midst of the worst recession in decades.

As it stands now, the bill would give the states a six-month grace period on debt to the federal government, followed by a year-and-a-half of reduced payments.

Heavy current spending is largely blamed for the fiscal crisis of states, now struggling to pay public servants' wages.

To ease market concerns, the government will work on new legislation to amend the fiscal responsibility law that limits states' current expenditures to less than 60 percent of their net revenues.

Brazil's budget deficit has ballooned to around 10 percent of the GDP from nearly 3 percent in 2013. The country lost its hard-won investment credit rating in 2015, when the recession began.

(Reporting by Alonso Soto, Cesar Raiser and Marcelo Teixeira; Writing by Anthony Boadle; Editing by W Simon and Grant McCool)